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Friday, 6 May 2011

Long run equilibrium of a firm

In the long run all inputs of a firm variable. If the demand increases or decreases, all the firms have a sufficient time to adjust their production according to the market conditions.

In the long run a firm can earn only normal profits because in case of continued abnormal profits new firms will enter into the market ans supply will increase to meet the demand. In case of continued losses certain firms will reduce their products or a few may leave the industry. In this case supply shall be reduced and the price will come up to its normal level. When a firm is earning a normal profit in the long run, it will express the following equation.

Marginal Revenue (MR) = Marginal Cost (MC) = AC = AR = Price.
So MR = MC = AC = AR = Price.
EXPLANATION :- In the long run a firm is in equilibrium at the point "M" . Because marginal cost, average total cost and average revenue are equal to each other. A firm total revenue is OPMK and its total cost is also OPMK. So OK out put is the best level of output and a firm is an equilibrium position. At OP price there is no tendency for the new firms to enter or leave the industry. All the competitive firms in the long run earn normal profit and there is no tendency for the new firms to enter or leave the industry they are in equilibrium when all the firms in the industry are in the state of full equilibrium equating price, marginal revenue, marginal cost, average total cost, to the industry itself is also in equilibrium.
When the industry is also in the long equilibrium there is an optimum allocation of resources. The consumer will get the commodity at a lower price because goods are produced at normal profit in the long run.

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